Merger Guidelines and the Limits of Our Understanding

The merger guidelines have evolved from a structural standard for determining the legality of mergers to an open-ended evaluation that attempts to predict whether some specific harm to competition is likely. These efforts have been unsuccessful; moreover, mergers generally contribute no positive economic gain. Blocking mergers that may have little or no adverse effect on competition will not cause significant economic harm; but the failure to interdict mergers that do cause harm imposes significant costs on the economy. Merger enforcement policy should return to the structural method of the 1968 Guidelines as well as impose stricter structural standards.     

Mergers and product quality: Evidence from the airline industry

Retrospective studies of horizontal mergers have focused on their price effects, leaving the important question of how mergers affect product quality largely unanswered. This paper empirically investigates this issue for two recent airline mergers. Consistent with the theory that mergers facilitate coordination but diminish competitive pressure for quality improvement, we find that each merger is associated with a quality decrease (increase) in markets where the merging firms had (had no) pre-merger competition with each other, and the quality change can have a U-shaped relationship with pre-merger competition intensity. Consumer gains/losses associated with quality changes, which we monetize, are substantial.     

Merger simulation using average market share: An application to the Optimus-TMN mobile merger case

This paper develops a new merger simulation methodology based on the analysis of the performance change of a hypothetical firm with average market share. It applies the methodology to the Optimus-TMN mobile telecom merger case in Portugal, within the context of the December 2006 decision by the Portuguese Competition Authority to authorize the merger between their respective parent companies, Sonaecom and Portugal Telecom. The results suggest that the Optimus-TMN merger would have resulted in 3.8% higher prices and 14.9% lower marginal costs, and would have been welfare-enhancing. These findings attest to the importance of the “efficiency defense” hypothesis of mergers. They suggest that competition authorities are warranted in allowing further consolidation in the telecom sector, but that consolidation should be accompanied by strict retail price-cap regulation.     

Fifty is the New Forty: EU Merger Policy Permits Higher Market Shares After the 2004 Reform

I analyze empirically all of the European Commission’s decisions regarding “unilateral effects” aspects of horizontal mergers before and after the 2004 reform, which introduced the “significant impediment to effective competition” test in merger policy. I find that, after the reform, the Commission did not change its stance toward mergers to monopoly or quasi-monopoly (almost always challenged) and mergers in un-concentrated markets (almost never). The new test produced more frequent challenges when the combined entity is not the largest firm, but these cases remain rare. The Commission’s stance toward mergers that fall between these polar opposites appears to have been tougher pre-reform ceteris paribus.     

Trade Union Mergers in British and Australian Television Broadcasting

A complex set of forces facing trade union organizations has meant that union restructuring vis-à-vis merger activity has been a prominent feature of many Western labour movements in the 1980s and 1990s. This paper is located in these structural developments, and its main contribution lies in the insights provided by an in-depth examination of recent union merger activity in commercial television in the UK and Australia. In contrast to the work of Undy et al . (1981), the results suggest that union mergers are influenced by more than changes in membership patterns, and that the delineation of merger categories may be far more complex than what has previously been identified by their model. It is argued, too, that the nature of the forces and the processes that led to the broadcasting union mergers in the UK and Australia were significantly influenced by the different institutional contexts of both countries. Finally, and related to this, it would appear that union merger outcomes (at least in the short term) are linked to the preceding processes by which merger is brought about. One policy implication of this is that anything other than a case-by-case evaluation of union mergers may be misleading.     

Reliable guidelines? A European comment

Merger guidelines mean to reduce the uncertainty related to the possible anti-competitive impact of mergers/takeovers by businesses undertaking them. It is doubtful, according to the author, whether the Revised Merger Guidelines of two US Antitrust Authorities achieve that goal. They would seem to be too ‘theoretical’ in the face of inevitably unique merger events; moreover, the theory in the Guidelines has some important weaknesses and limitations. From an EC competition policy point of view, an efficiency trade-off for a dominant-firm merger is considered dubious procedure.     

Harm to Competition Under the 2010 Horizontal Merger Guidelines

In August, 2010, the Antitrust Division and the Federal Trade Commission issued new Guidelines for assessing horizontal mergers under the antitrust laws. These Guidelines were long awaited not merely because of the lengthy interval between them and previous Guidelines but also because enforcement policy had drifted far from the standards articulated in the previous Guidelines. The 2010 Guidelines are distinctive manly for two things. One is briefer and less detailed treatment of market delineation. The other is an expanded set of theories of harm that justify preventing mergers or reversing mergers that have already occurred. The 2010 Guidelines reflect a growing belief that in markets where product differentiation is minimal competition tends to be robust and the structural presumptions stated in previous Guidelines were too harsh. By contrast, where product differentiation is substantial the Guidelines?? approach tended to define markets too broadly, overlooking significantly anticompetitive possibilities. Under the 2010 Guidelines unilateral effects analysis relevant markets can be very small, often limited to three or four firms, and excluding some obvious substitutes. Markets in merger analysis are not defined for their own sake, however, but rather to ascertain whether a particular alteration in market structure covered by the merger provisions will be likely to facilitate a price increase. The 2010 Guidelines address four substantive merger concerns: exclusion, restraints on innovation, unilateral effects, and coordinated effects. The Guidelines have a separate section on mergers limiting ??innovation and product variety,?? treated mainly in the category of unilateral effects. The 2010 Guidelines are more flexible than previous Guidelines and also more catholic about the types of harms that mergers might cause and the techniques that can be used to assess them. Older Guidelines were excessively wed to methodologies that were at the forefront of applied merger analysis when they were drafted, but that tended to make the Guidelines obsolete as new methodologies became available. Not only do methodologies change, they are also specific to the situation. Further, they tend to be well developed in the literature and accessible to experts consulted by those defending a merger as well as to the government economists who employ them. To be sure, there is a tradeoff between flexibility and guidance. Often we can have more of one only by giving up some of the other, and that tradeoff is clearly present in the 2010 Guidelines.     

Comment on Dewey's “Merger Policy Greatly Simplified/Building on Keyes”

Professor Dewey's mock proposal for a new merger policy differs from Keyes' serious proposal in at least two important respects. First, the Dewey plan would accord different treatment to mergers which result in the growth of “large” industrial companies as compared with mergers which do not. No such size discrimination is recommended by Keyes. Second, the Dewey plan would allow even the former class of mergers to go forward after passing a purely procedural “test”. No genuine “efficiencies defense” would be required.     

Conglomerate mergers and subsequent industry effects

The focus of most studies of conglomerate mergers has been on the effects on companies involved. Of more direct relevance to antitrust policy is the question of industry effects of this type of merger. This article looks at eleven cases of “large firm/leading firm” conglomerate mergers completed between 1958 and 1970 and examines census data to see if structure or performance of the acquired “leading firm's” market was altered due to the merger. The results suggest that industry structure is not significantly affected, but that there may be adverse performance effects when the acquired firm is a leader in an unconcentrated market with substantial entry barriers.     

Endogenous horizontal mergers under cost uncertainty

This paper presents a study of endogenous horizontal mergers under cost uncertainty. Before knowing the exact values of their costs, firms decide sequentially whether or not to join a merger. After the merger decision is made, uncertainty is resolved and firms engage in Cournot competition with incomplete information about one another's costs. Due to production rationalization, the merged firms enjoy an advantage over non-merged firms in the sense that the merged firms' expected cost is lower. I show that mergers occur if and only if the uncertainty is large and that the larger the uncertainty, the greater the number of firms that will merge. Although a merger reduces competition and therefore hurts consumers, it improves productivity under cost uncertainty. I find that a merger increases social welfare whenever there are at least four firms in the industry before the merger.     

Market Definition?

The 2010 horizontal merger guidelines issued by the antitrust agencies de-emphasize market definition, which has been a foundation of merger law for decades and was required by previous guidelines. The justification for this change is that unilateral adverse price effects caused by mergers of firms that produce differentiated products are best assessed using analyses that do not depend on market definition. Though the guidelines unquestionably serve a value in illuminating actual agency practice, any marginal benefit in dropping the exercise of market determination from the merger review process is likely to be small, and the marginal cost may be substantial.     

ENTRY DETERRENCE BY NON‐HORIZONTAL MERGER*

We study when and how pure non‐horizontal mergers, whether cross‐product or vertical, can deter new entry. Organizational mergers implicitly commit firms to more aggressive price competition. Because heightened competition deters entry, mergers can occur in equilibrium even when, absent entry considerations, they do not. We show that, in order to prevent a flood of entrants, mergers arise even when a marginal merger costs incumbent firms more than does a marginal entrant.     

Analytical Screens for Electricity Mergers

Electricity mergers pose distinct challenges for competition policy. Electricity demand is highly inelastic in the short run, storage is limited, and transmission constraints limit the ability to substitute generation at other locations. As a result, a merger can affect prices in many different markets and even generators with small market shares may be able to exercise market power. The U.S. Federal Energy Regulatory Commission’s approach for screening horizontal mergers, based on the concentration thresholds in the Department of Justice/Federal Trade Commission Horizontal Merger Guidelines, can fail to identify mergers that lessen competition, and mergers that fail the FERC screen may have no significant anticompetitive effect. We propose competitive residual demand (CRD) analysis, which examines the supply curves of the markets affected by a merger and considers the ability and incentive of firms to raise prices before and after a proposed merger. CRD analysis is a relatively easy way to address the incentives for generators to exercise market power and relies on data that are often available. Vertical (convergent) mergers between electricity and gas raise additional concerns, and we propose a methodology to screen vertical mergers.     

On the competitive effects of vertical integration by a research laboratory

An independent research laboratory owns a patented process innovation ready to be used by an industry that produces differentiated goods. We analyze whether the laboratory prefers to license the innovation as an external patentee or to merge with one of the firms in the industry, licensing the innovation as an internal patentee. Under linear demand and Cournot competition, we show first, that the vertical merger is profitable only in the case of small innovations, whereas a merger increases welfare only for significant innovations; second, all profitable vertical mergers reduce welfare. However, some profitable mergers are welfare improving under price competition.     

Preemptive mergers under spatial competition

Mergers for market power generally benefit outsider firms more than participating firms. Hence, outsiders should welcome such mergers between their competitors but, frequently, this is not the case. Under spatial competition some outsiders gain more than the participating firms but others might benefit less. Thus, if the number of admissible mergers is limited, firms may decide to merge to preempt rival mergers. This paper studies the incentives for preemptive merger by firms engaged in spatial competition.     

Horizontal merger analysis

Economic analysis of competition regulation is most developed in the domain of horizontal mergers, and modern agency guidelines reflect a substantial consensus on the appropriate template for merger assessment. Nevertheless, official protocols are understood to rest on a problematic market definition exercise, to use HHIs and ΔHHIs in ways that conflict with standard models, and more broadly to diverge with how economic analysis of proposed mergers should be and often is conducted. These gaps, unfortunately, are more consequential than is generally appreciated. Moreover, additional unrecognized errors and omissions are at least as important: analysis of efficiencies, which are thought to justify a permissive approach, fails to draw on the most relevant fields of economics; entry is often a misanalyzed afterthought; official information collection and decision protocols violate basic tenets of decision analysis; and single-sector, partial equilibrium analysis is employed despite the presence of substantial distortions (many due to imperfect competition) in many sectors of the economy. This article elaborates these deficiencies, offers preliminary analysis of how they can best be addressed, and identifies priorities for further research.     

Applying “Merger Guidelines” market definition to (de)regulatory policy: Pros and cons

Since initially presented in the 1982 Department of Justice Horizontal Merger Guidelines, market definition has been adopted nearly worldwide as a framework to see if a merger would substantially lessen competition. This framework is useful for addressing the similarly counterfactual question of whether forbearance from regulation would lead to an increase in prices. In this context, however, the usefulness of a merger-based market definition is limited. Because the alternative to forbearance is regulation, and since some regulated rates may be below competitive levels, finding that deregulation would lead to market power as defined for mergers need not justify continued regulation. Forbearance in telecommunications highlights market definition questions regarding gross vs. marginal substitutes, dynamic efficiencies, and service bundling. It also reveals ambiguities in the meaning of “geographic market.” Market definition also has limited applicability if regulation exists not to prevent high prices but the abuse of dominance through predatory pricing.     

Merger Control Policy Under China’s Anti-Monopoly Law

China??s merger policy and enforcement approaches since its Anti-Monopoly Law (AML) took effect in August 2008 are by and large based on the same conceptual framework that is employed in advanced economies. While China has shown a very fast learning capability in conducting competition analysis, further capacity building in China is crucial. There is no clear evidence of industrial policy considerations being at the forefront in the eight published decisions by the Ministry of Commerce to date, except for its very early decisions. We propose a competition-neutral principle, which requires that a competition test be conducted before, and independently from, any consideration of industrial policy and argue that industrial policy matters only for competition-neutral mergers. On a more technical level, if China adopts the total welfare standard, then its treatment of efficiencies and the meaning of sufficiency of entry post merger should be modified accordingly from the US/EU consumer-oriented model.     

Mergers that harm competitors

Standard models of oligopolistic interdependence predict that firms remaining outside of a horizontal merger will benefit from it. Why, then, do nonparticipating firms feel threatened by mergers? This paper shows that under reasonable conditions a non-participating firm is harmed by a merger. The analysis is based on a spatial equilibrium with suppliers and demanders located at fixed points. Mergers harm non-participating firms as a result of the decrease in the level of marginal costs of the merged firm attributable to decreased output in markets where competition is eliminated. This lowered marginal cost makes the merged firm a more formidable competitor in markets in which outsiders participate. This effect is in almost all cases sufficient to make outsiders worse off after a merger. Simulations on a sample of spatial equilibria show that the harm to outsiders is a reliable index of the harm that the merger causes to social welfare.     

A Structural Approach to Market Definition With an Application to the Hospital Industry

Market definition is common in merger analysis, and often the decisive factor in antitrust cases. This has been particularly relevant in the hospital industry, where many merger challenges have been denied due to disagreements over geographic market definition. We compare geographic markets produced using frequently employed ad hoc methodologies to structural methods that directly apply the ‘SSNIP test’ to California hospitals. Our results suggest that markets produced using previous methods overstate hospital demand elasticities by a factor of 2.4 to 3.4 and were likely a contributing factor to the permissive legal environment for hospital mergers.